Crowdfunding: new rules to benefit platforms, businesses and investors

In March 2018 the European Commission released its plans to boost crowdfunding activity in the EU as part of its wider FinTech Action Plan. The European Crowdfunding Service Providers (ECSP) Regulation – and its accompanying Directive amending MiFID II – proposes a voluntary EU regime for lending-based and equity-based crowdfunding service providers (i.e. platforms).

The aim is twofold: i) enabling crowdfunding platforms to operate across the EU through a clear passporting framework to improve access to this innovative form of finance for businesses; and ii) building investor trust and ensuring investors and platforms’ protection by establishing clear rules on information disclosures, rules on governance and risk management, as well as a coherent approach to supervision.

With the EU parliamentary elections fast approaching, the Commission has called on the co-legislators to adopt the proposal before the end of the current legislative mandate. As things stand, only the European Parliament (EP) seems to have committed itself to such a goal. On 5 November the Economic and Monetary Affairs (ECON) Committee adopted its reports and approved the entry into inter-institutional negotiations as soon as the Council agrees its position.

The EP’s text, rapporteured by Ashley Fox (ECR, UK), builds on the Commission’s proposal by strengthening provisions related to complaints handling, investor protection, conflict of interests and marketing communications, among others. In so doing, it provides platforms with increased flexibility and accountability.

More significantly, Fox’s report introduces two key changes. Firstly,  raising the threshold for crowdfunding offers from €1 million to €8 million per year, recognising the increasingly large sums raised in funding rounds. Secondly, a shift in the authorisation and supervision competences from the European Securities and Markets Authority (ESMA) to national competent authorities (NCAs).

In the Council, negotiations have been slower with only three Council Working Parties (CWP) being held to date. Discussions remain at an early phase and concrete compromises are yet to be forthcoming.

Perhaps the most contentious element being discussed in the Council is the idea of the Commission’s proposed 29th regime (i.e. an EU-level regime that does not harmonise national laws, but sits alongside them, providing an alternative legal order) which would compete with national regulatory frameworks and could result in regulatory arbitrage. Instead, most Member States appear to favour a ‘minimum harmonisation’ approach that does not contest existing national legislation.

Another sticking point is the authorisation and supervision of platforms. As in the EP, many in the Council have expressed their preference for NCAs to be the lead supervisor despite continuous claims bv the Commission that ESMA is best placed to ensure the harmonised application of the rules.

Against this backdrop, the EP’s vote should pave the way for a rather swift agreement with the Council, if and when a General Approach is reached. The EP’s report avoids all the red-lines set by the Council during its initial discussions and provides a good base for further work at the coming CWPs. This comes despite the rapporteur’s attempts to include initial coin offerings (ICOs) within scope of the Regulation and set up of a third-country regime, ECON MEPs did not back such changes, which would have slowed negotiations.

Overall, it is unclear whether the Austrian Presidency will manage to reach a General Approach by the end of its mandate. However, Romania, which will hold the next Presidency of the Council, seems keen to push negotiations here as far as possible. A final agreement between the co-legislators before the end of the current European parliamentary term is therefore attainable.

Nicolas Balcell